Is China ‘through-train’ back on track?

Commentary: Hong Kong chief executive gets timely boost

HONG KONG (MarketWatch) — Arrivals in Hong Kong from mainland China have become increasingly unpopular — be it pregnant mothers, parallel traders or pollution from across the border.

But this flow of feel-bad imports could be reversed after reports that a long-stalled mainland Chinese investment “through-train” is back on track.

The timing would also be helpful for beleaguered Hong Kong Chief Executive CY Leung, who badly needs some good news ahead of his first policy address this week.

If facing an impeachment vote in the Legislative Council last week was not bad enough, Leung has also suffered the ignominy of protest marchers waving pre-1997 British colonial flags.

Reuters

A statue of a bull outside the trading hall of the Hong Kong Stock Exchange.

Since taking office last July, Leung’s perceived close ties with Beijing have proved more hindrance than help, as mainland China’s influence has been blamed for everything from inflation and housing shortages to unnecessary mega-transport projects. A reminder that the Chinese mainland can also deliver good-news imports would be helpful.

On Friday, the People’s Bank of China announced preparations are underway for its so-called “qualified domestic individual investor” scheme. This news could help reinforce Hong Kong’s position as China’s premier capital market and give a near-term lift to equities.

Of course, there have been false starts before since the through-train idea was first floated in 2007. But this time, it could be in both Hong Kong and Beijing’s interests to proceed.

Equity-market conditions have turned full-circle since then. Gone is the investment mania, particularly on the mainland. But this could play to Hong Kong’s advantage.

One explanation for the through-train hitting the buffers was that Beijing’s bigger priority was developing its mainland stock markets.

As well as getting more of China’s better Hong Kong-listed companies to dual-list in Shanghai, regulators were also pushing for the establishment of an international board. This would have seen blue-chip multinationals and global banks list shares in Shanghai.

Beijing pollution sends air quality index to extreme levels

(0:35)

Air pollution darkens skies in Beijing over the weekend. An air-quality index at the U.S. embassy shows a reading of 755, far above high readings that typically only take place during rare events such as forest fires. Photo: Getty Images.

The latter plan has also been delayed, however, hit by the reality of deteriorating market conditions. Since the financial crisis, the Shanghai Composite Index
000001, +0.57%
has been one of the world’s worst performing equity benchmarks — down roughly 60% — making a valuation upside from listing directly in mainland China look remote.

The slide in equity prices has also coincided with a slump of domestic retail interest in equity investing in China, delaying grand plans for Shanghai to usurp Hong Kong as a financial center.

Arguably, mainland regulators’ biggest priority now is to raise the quality of local publicly listed companies. Investor confidence has been battered by numerous cases of corporate wrongdoing from accounting fraud to insider trading.

And mainland listings have not just done badly in Shanghai but on bourses around the world. In the U.S., Chinese listings have perhaps had the most high-profile unraveling, with a wave of de-listings and falling share prices.

Now it is not a case of where will Chinese companies list, but whether they can list anywhere.

This could work to Hong Kong’s advantage, as the territory has traditionally been China’s de-facto capital market. The Hong Kong Stock Exchange (HKEx) has a longer track record at scrutinizing mainland listings and weeding out questionable candidates, and it has probably fared the best with Chinese listings despite a handful of scandals.

Regulators have also stepped up oversight, as more powers have been handed to the Securities & Futures Commission.

This year, for instance, a new Insider Trading Ordinance came into effect, with statutory backing and bigger fines — up to 8 million Hong Kong dollars (just over $1 million). There are also new rules to make sponsors of IPOs liable for the accuracy of what goes into a prospectus.

If Chinese companies need to list — both those directly from the mainland or ones looking to re-list from the U.S. — Hong Kong might still be the path of least resistance. In current conditions, however, any IPOs are still tough.

But if you introduce mainland Chinese investment into Hong Kong, this could add an extra support to make the difference.

No other details were forthcoming, but any trial might be extended on a city-by-city basis. It is likely a gradual approach will be taken, rather than allowing unrestricted individual investor buying.

There are other factors that point to a move being more likely this time.

As China continues efforts to internationalize the yuan, it needs to take more steps to have a two-way flow of its currency. And if it really wants to make its capital account fully convertible, it needs to take more some steps on the way, rather than risk a potentially destabilizing big-bang opening.

Ultimately, introducing the through-train should be in China’s interests, as well as Hong Kong’s. If true, it may give CY Leung some short-term cover during his policy address, with a reminder not all mainland Chinese imports are bad for Hong Kong.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.